Understanding marginal revenue and how it shapes price and output decisions

Imagine you’re running a little neighborhood cafe. You’ve got a nice rhythm: a steady stream of customers, a few friends dropping by, and the occasional rush when a bus stops right outside. Now, you’re wondering about selling one more croissant. Not a whole batch, just one extra pastry. How much extra money would that bring in? That “extra money” is the heart of a simple but powerful idea in microeconomics: marginal revenue.

What is marginal revenue, really?

Here’s the thing in plain terms: marginal revenue is the additional revenue you gain from selling one more unit of a good or service. It’s a way to measure the payoff of expanding output, even if that expansion is tiny. In math-y language, it’s MR = ΔTR/ΔQ, where ΔTR is the change in total revenue and ΔQ is the change in quantity sold. But you don’t need a calculator to feel what that means. It’s the incremental money you can expect—before costs—when you push output just a notch higher.

Why not just look at the price?

Because revenue isn’t always the same as the price you charge for one unit. If you’re selling a lot of units and you want to sell one more, you might have to lower the price a touch to attract that extra buyer. When demand slopes downward, price isn’t a fixed number for every unit sold. The effect of lowering the price on all units sold matters, and that drags the extra revenue down. This is why marginal revenue is often smaller than the price you’re charging for that last unit.

A quick, friendly comparison: marginal revenue, average revenue, and price

• Marginal revenue (MR): the extra revenue from selling one more unit.

• Average revenue (AR): total revenue divided by quantity (TR/Q). In many simple settings, AR is the price.

• Price: what customers actually pay for a unit.

There are two classic scenarios to keep in mind:

• In a perfectly competitive world (lots of buyers and sellers, identical products), MR equals AR and MR equals price. Every extra unit you sell increases revenue by exactly the going market price.

• In a market with some power (like a monopoly or a firm with market influence), MR tends to be lower than the price. To sell more, you usually have to drop the price on all the units you’ve already sold. That drag on revenue makes MR fall below the price.

A down-to-earth example

Let’s walk through a simple, friendly setup. Suppose the price is governed by a downward-sloping demand curve, described by P(Q) = 20 − Q. Total revenue is TR(Q) = P(Q) × Q = (20 − Q) × Q = 20Q − Q^2. Marginal revenue, the slope of the TR curve, is MR(Q) = d(TR)/dQ = 20 − 2Q.

• When you’re selling 0 units, MR is 20.

• When you’re at Q = 5, MR = 20 − 10 = 10.

• When you’re at Q = 9, MR = 20 − 18 = 2.

• If you tried to push to Q = 10, MR would be 0 (and you’d have to add more than zero to revenue to justify it, in many real-world cases).

Notice what’s happening: MR is positive for small to midrange outputs, but it falls as you push output higher. The price you charge at Q = 5 is P = 20 − 5 = 15, which is higher than MR = 10. The difference is exactly the effect of lowering price on all units sold when you push output up.

Where MR meets MC: the profit-maximizing quantity

Businesses don’t just chase any amount of extra revenue. They compare MR to marginal cost (MC), the cost of producing one more unit. The classic rule is simple:

• Produce another unit if MR > MC.

• Stop when MR = MC.

• If MR < MC, you’ve gone too far; reduce output.

Let’s say your marginal cost curve is such that MC at Q = 5 is 8, and MC at Q = 6 is 9. From our MR calculation:

• At Q = 5, MR = 10. Since MR > MC (10 > 8), you gain by producing more.

• At Q = 6, MR = 8. If MC at Q = 6 is 9, then MR < MC (8 < 9). Pushing to 6 would reduce profit.

So the profit-maximizing quantity is around where MR and MC cross. In real life, you’d look at the exact MC schedule and pick the last quantity where MR is still at least as big as MC.

Normal profits, abnormal profits, and the big picture

To understand why MR matters beyond the math, a quick detour into profits helps.

• Normal profits: the break-even point for a firm. In economic terms, they’re the return needed to keep a firm in business in the long run. If total revenue just covers total costs (including the opportunity costs of capital and entrepreneurship), profits are normal.

• Abnormal (economic) profits: profits above the normal level. These happen when a firm has some cushion of market power, branding, or barriers that let it earn more than the normal return.

Where does MR fit in? If MR is consistently higher than MC across a range of outputs, a firm can push output and likely see profits rise—until MC climbs fast enough to catch MR. If MR is consistently lower than MC, trimming output makes more sense. In perfectly competitive markets, long-run pressure tends to erode abnormal profits, nudging prices toward the point where MR = MC and profits settle at the normal level.

The intuition you’ll carry into exams (without the exam-hype)

• Marginal revenue is about the next dollar of revenue you gain from one more unit.

• If demand is elastic (customers are responsive), you’ll often see MR fall quickly as you increase quantity, because price has to drop a lot to sell more.

• If demand is inelastic (customers aren’t that sensitive to price), MR stays closer to the price for a while because you can raise revenue with less price drop.

• The key production decision comes from MR versus MC: chase the output where MR just equals MC.

A few practical takeaways

• In a price-taking world (think simple competition), MR almost always equals the price. If you’re modeling a small vendor or a perfectly competitive market, that makes MR and price practically the same number to work with.

• In markets with some power, MR lies below the price. The drop from price to MR matters for how much you should push output.

• Normal and abnormal profits aren’t just abstract labels. They hint at whether a firm’s market structure is likely to change: if abnormal profits persist, new entrants or innovations might chip away at them, shifting MR and MC in new ways.

A tiny, memorable analogy to keep in mind

Think of MR as the “oomph” you get from selling one more unit. It’s the extra cash in the till, minus the price drop you might have to accept across all the units you’ve already sold. MC is the cost of turning on the oven for that extra croissant. If the extra cash (MR) beats the extra oven cost (MC), you bake another. If not, you stop a little short of that sweet crosspoint.

A couple of quick reflections you can carry with you

• MR isn’t just a single number you memorize. It changes as you produce more, especially when price must adjust to sell more.

• The relationship between MR and price is a window into how market structure shapes business choices. A high, stable MR relative to MC often signals a more competitive environment; a wide gap between price and MR can hint at market power and the potential for longer-run strategic decisions.

If you’re ever unsure about a question that asks you to identify the term for the extra revenue from selling one more unit, just remember: marginal revenue is that incremental money—plus a little mental math about how price shifts when you push output. It’s a small concept with a big impact on how firms decide how much to produce.

A gentle wrap-up

Marginal revenue is a cornerstone concept in microeconomics, cutting through price, output, and profits with clarity. It’s the practical tool that helps bridge intuition and calculation: first, imagine the tiny nudge of one more unit; then, compare that nudge to the cost of making that unit. When the math lines up—MR meets MC—you're looking at the profit-maximizing path. When MR stays comfortably above or below MC, you know which way output should move. And when you keep AR and MR straight in your head, you’ll see the bigger picture: how markets shape the everyday choices behind the numbers we study.

If you want a clean mental model to test yourself, try this mini-quiz next time you’re thinking about MR:

• Is MR greater than, equal to, or less than MC at the current output?

• How does MR compare to price in a market with strong competition? How about a market with power?

• What does the gap between AR and MR tell you about the demand curve?

These threads weave together to give you a practical, human grasp of marginal revenue—one that goes far beyond memorization and into real-world sense-making.